(How to avoid ) Tons of trouble in SAP’s software licence bubble

On indirect use, a brake on the Internet of Things and Industry 4.0, financial and legal uncertainty and a disturbed relationship between software suppliers and their customers.

While many software vendors are pushing their customers - gently or more forcefully - towards the cloud and are claiming to be modern businesses, in practice they are still often using old-fashioned contract clauses that frustrate their customers' roll-out of the Internet of Things and the development of Industry 4.0, and wreck their own reputation and goodwill. 

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SAP versus Diageo and AB Inbev

It was an unusual but - in the short term - extremely lucrative campaign by SAP.  About 2 years ago, Europe's best-known supplier of ERP software successfully crossed legal swords with its customer, Diageo Great Britain Ltd, the producer of Smirnoff vodka, among other brands. SAP demanded a £55 million supplementary payment and forced Diageo to its knees. Indeed, on 17 February 2017, the UK court ruled that Diageo had infringed SAP's licensing conditions on account of unauthorised indirect use, and Diageo had to pay an additional licence fee to SAP, to be determined. 

Immediately after the positive decision, SAP also made a claim against AB Inbev, the beer brewer. Level of the claim: 600 million US Dollars. This claim was also based on indirect use or indirect access. AB Inbev then announced that it would vigorously oppose what it considered to be an unjustified claim. 

SAP users shocked

SAP users were suddenly shocked and afraid. Indirect use is high on the agenda in many boardrooms and SAP users have asked SAP for clarification regarding this term.  What does SAP actually mean by indirect use/usage or indirect access?

Indirect use

SAP applies a very broad definition of the term 'use'. According to the general terms and conditions (part of the software and licence agreement) of SAP Nederland, this means: activating the processing functions of the SAP software, loading, executing, opening, using the SAP software or displaying the resulting data of those functions".

On the other hand, as far as I am aware, SAP has not (yet) included a definition for indirect use or indirect access in its agreements and/or general terms and conditions. 

Fortunately, the VNSG (Association of Dutch SAP Users), which regularly consults with SAP, offers some light in the darkness. According to the VNSG, indirect (SAP) use occurs when SAP functionalities are used without the use of a named user licence or a SAP user interface.

Many SAP users not only use SAP software but also other software. To avoid having to work with multiple datasets, they often integrate different solutions with their SAP software. This is referred to as application integration or software integration. In the cases of Diageo and AB Inbev, there was integration of SAP and Salesforce software, an integration that SAP was clearly not happy about.

Indirect use may also occur if sensors or bots use SAP functionalities without a named user licence or

SAP user interface.

Continuous concern 

SAP-1.png#asset:448

The national and international associations of SAP users and the SAP users themselves were very concerned about this because they feared that they would be faced with high additional charges, just like Diageo and AB Inbev. Subsequent charges that could cause a full year's profit to evaporate, or result in red figures or worse. 

The concern about indirect use or access has not disappeared yet.

On the contrary! Both Diageo and AB Inbev have now reached an amicable agreement with SAP, the content of which has deliberately been kept secret from the outside world. 

This has increased concerns even further. After all, if large companies such as AB Inbev and Diageo do not dare to do legal battle with SAP, what are the opportunities and risks for other, equally large or smaller companies? These companies have often accepted the same (standard) provisions of SAP as Diageo and AB Inbev, and face the same audit teams.     

Have Diageo and AB Inbev paid the claimed GBP 55 million and USD 600 million in full, or just a fraction of these amounts? And what has been agreed on indirect use? We will probably never find out.

New licensing model

On 10 April 2018, SAP launched a new licensing model for indirect use for new SAP customers. Under the new licensing model, SAP calculates the licences for indirect use on the basis of the generation of 9 specific document types. If one of these document types (such as a sales, purchase, invoice or financial document) is generated through external use, a licence is required and has to be paid for via an agreed number of documents per year.

Existing customers can opt for this new licensing model, they can add the new model for indirect use as an addendum to the existing contract or they can keep the old, existing contract.

Lack of clarity and a lose-lose situation

There is still a great deal of uncertainty and confusion about the costs of the new licensing model for indirect use. Existing SAP users do not know whether the transition to the new licensing model will be beneficial or unfavourable for them and whether they can expect a claim, like those against Diageo and AB Inbev. New users do not know what the costs of the new model will be, and are postponing their purchases.

In short, for SAP it is goodwill-sapping and reputation-damaging trouble rather than a commercial and legal trifle. And for SAP customers, it means financial and operational stagnation rather than progression and further integration. A lose-lose situation that is far from desirable.

Not limited to software supplier SAP

SAP is not the only software supplier that prohibits indirect use of or indirect access to its software, or requires the purchase of (additional) licences for that use.

Many other software suppliers, including Microsoft, Oracle and IBM, also prevent indirect use, by including a contractual prohibition on "multiplexing" or "pooling" in their agreements, for example; this is a way to reduce the number of users and devices while maintaining the number of licences. Or simply by stipulating that any use other than the agreed use is not permitted.

Customers of these suppliers are also at risk of potential legal action.

Not only Salesforce

SAP primarily targeted the software of Salesforce in its actions against Diageo and AB Inbev. This software or connector made integration with SAP possible and led - for SAP - to a decrease in the number of users and thus licences and licence income.

However, other software, including software developed by or on behalf of companies themselves, that provides access to or connects to SAP or other vendor software, may also infringe the licence and may result in additional licence fees and litigation. In addition, bots, IOT devices and other items that communicate with or have access to the licensed software can also give rise to discussions, lawsuits and financial problems. 

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 Tips for buyers of ERP and other software

The problems between SAP and Diageo and AB Inbev are due to insufficient contract management on the part of Diageo and AB Inbev on the one hand and old-fashioned contracts on the part of SAP on the other. In the future, it will be more than worthwhile for software purchasers to properly map out which use of the software is and is not permitted and to make clear - and if possible deviating from the standard - tailor-made agreements with the software supplier about the current and future use of the software.

Attention should not only be given to the price and functionality of the software, but also to the other content of the contract. This is because the content determines the company's opportunities for growth and prevents the proverbial 'contractual stranglehold' or 'vendor lock-in'.  Most current SAP users are now all too aware of this.

C4 (Crystal-Clear Contract Clauses) as a new business model for suppliers?

Although SAP reached a secret settlement with Diageo and AB Inbev, which has undoubtedly made it a lot of money, the inevitable impression created is that SAP's position on indirect use has backfired. Given all the commotion, confusion and uncertainty among existing and new customers, the postponement of customers' investment decisions and all the negative publicity, it seems to have been a short-term victory but a long-term strategic failure.

A failure that has done the reputation and goodwill of SAP no good whatsoever. SAP brought this situation on itself by paying insufficient attention to contract management, as did its customers.

I therefore believe that it would be advisable for software suppliers to draw up clear contracts that clearly state what use and access are and are not permitted under the licence.

In view of the current trend of far-reaching application integration, Industry 4.0, the ever-expanding IOT landscape and the rapidly increasing number of sensors, devices and (ro)bots, it seems wise also to anticipate these developments and to include clauses to this effect in agreements with customers. Entrepreneurs want to know where they stand, so that they can anticipate and invest in the future. Without the possibility of being ambushed by unclear and archaic contractual provisions that impede their innovations.

 A software vendor that has the courage to take future developments into account, recognises that - given the Internet of Things, Industry 4.0 and the ever-growing number of sensors and (ro)bots - indirect access is inevitable, and is willing to translate this into a crystal-clear contract before the competition does, could well become the new SAP or Microsoft. With a C4 business model, i.e. Crystal-Clear Contract Clauses, and a progressive, customer-oriented licensing policy, this supplier could be very successful in the connected world of tomorrow. 

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